Advantages & Disadvantages of a Price Ceiling

by Melanie Hammond, Demand Media

Medieval restrictions on bread prices were one of the earliest forms of price ceilings.

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Price ceilings, a commonly utilized method of price control, have been in practice since ancient times. Hugh Rockoff, author of the article Price Controls, makes reference to the Old Testament prohibition on loan interest fees and the medieval practice of controlling bread prices. Products of considerable importance to the public, such as gasoline, food, and pharmaceuticals are still subject to price controls today. It’s essential for small business owners to know what price ceilings are, to be able to identify the advantages and disadvantages of price ceilings, and be familiar with the expert opinion on the use of price ceilings.

Price Ceilings

Price ceilings are government enforced sanctions preventing suppliers from setting prices of key resources higher than the price determined by the government. Price ceilings alter market supply and demand. From an economic point of view, supply is how much of a product is available in the marketplace, which will decrease as prices decrease. Demand represents the public longing for a particular product and will naturally increase as price decreases.

Price Ceiling Advantages

Price ceilings help prevent suppliers from engaging in price gouging, or charging outrageously high prices for limited goods or services simply because they are able to. Price ceilings are also beneficial for keeping the cost of living affordable during periods of high inflation. Inflation describes the trend of prices for goods and services to gradually increase over time. During high inflationary periods, prices increase faster than incomes, which reduce the dollar’s purchasing power, making price ceilings necessary for consumers to maintain their standard of living.

Price Ceiling Disadvantages

Price ceilings can have negative impacts on the marketplace too. Suppliers are discouraged from producing more of an item when they can’t set their own prices, therefore, supply of key resources will decline, reducing availability to the market. Price ceilings also reduce the quality of products, as suppliers have less financial resources to reinvest in their business.

Considerations

The general economic consensus is disagreement with the long-term use of price controls, including price ceilings, with the exception for brief use during periods of high inflation. Economists theorize that in the long run consumers suffer, because price controls tilt the distribution of resources in favor of the rich and well connected. Price ceilings, for instance, cause shortages, because demand will increase as supply decreases. Some consumers will be fortunate enough to purchase products at the fixed level, while other consumers will not be so lucky. Further exacerbating the problem are corrupt suppliers who will set aside limited product for family and friends or those who can afford to pay a premium, effectively reducing the already limited supply.

About the Author

Hammond earned a Bachelor of Science in Marketing, including concentrations in retail and promotions, from Southern Illinois University in December 2006, and a Master of Business Administration degree from Southern Illinois University in May 2009. Hammond was editor of Signal, a radio programming guide, and contributor to Previews, a television programming guide, both publications of WSIU Public Broadcasting.

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